5 Good Reasons to Cancel Your Project

Now that I have your attention, I can add the caveats. Canceled development projects are not good things. They represent lost investment in terms of money and people. They generally lead to poor morale as people who have put considerable effort into a program find that their efforts have been wasted.

But the optimal number of canceled projects is not zero, particularly in the high-tech sector. There are too many unknowns when a project is launched to say emphatically that every program should go through to completion. Here are five situations when canceling a project is a good thing.

1. The project is successful
Huh? How can a project be successful before it is released? And why would you want to cancel it?

This goes to the definition of "successful". Many years ago, I attended a class taught by the software development guru Tom DeMarco. He described two successful projects. One project met all its schedules and cost goals and delivered a great product that made lots of money. The second project developed a product that was not destined to be successful. The company recognized that quickly and canceled the project before too many resources were invested into it.

The truth is that there are many technical and market unknowns for any project, and the early stages of a program should determine if a particular investment is warranted. Finding the answer quickly and canceling a program early (if the answers come back negative) is a successful project in itself.

A project in development must go through periodic checks to ensure that the project is of value as of that date. Also, analysts come up with the idea for the project, and the clock starts ticking. Opportunity costs start decreasing from that point on, and if the project (talking about electronics) takes a long time then the company has to ensure other companies don't have enough market buzz on that same product.

On one hand, "sunk costs don't matter". On the other hand, opportunity cost keeps increasing as time goes by. It's a bit conflicting. Opportunity cost is a sunk cost. It has to matter. But it's difficult to know when to stop from this alone. The situation with competition or competing technologies seems a faster or clearer way to judge. Yet when the competition scores, not keeping up by cancelling the project is also a big risk. But it would mean the project goal(s) would be changed. The majority of projects are stopped just for the first reason: successful completion.

Think of opportunity cost as the income from your best availabe alternative. That is the income you are forgoing by choosing the original project. Strictly speaking it is not a cost, as there isn't an actual cash flow. I brought up this concept to illustrate that project selection is a choice between alternatives, and would not mix it up with other concepts, such as sunk cost. As a project progresses, the opportunity cost decreases, only in so much as the smaller remaining resources to complete the project mean less resources to execute an alternative as well.

Another way to think of this is to always compare future investments and future returns.

Ok, thanks for the explanation. So would the opportunity cost really be the value of the alternative subtracting the sunk costs? I'm thinking the value of the alternative is not static, may also be growing.

The opportunity cost is simply the missed opportunity of the best non-staffed project. I think it is fairly static. Once it is identified, that is the cost. It would only change if an even better project is identified. If anything, you could argue that the opportunity cost diminishes with time, since the effort to finish the staffed project should be diminishing with time, leading to fewer resources to invest as an alternative. Example: If you only need one more day to wrap up a project, the opportunity cost is minimal, since it is hard to imagine you could refocus that remaining day of effort to get any appreciable return from an alternative.

Sunk costs are merely costs that have already occured. The point of mentioning them is that you should be comparing future returns and investments. That is, ignore the costs that have already occurred, e.g. sunk costs.

These two dynamics are why so many projects are completed, even if in retrospect some should not have been started. If you are half done with a project, the return on remaining investment has doubled. Most likely, the opportunity cost has halved as well, since the available investment has halved. A project looks increasingly attractive as it marches towards completion- except for the cases I outlined in my column, where new information has caused a reevaluation.

Your management team has burned away soooo much money in preparing and scoring the project to sell it to the customer for too lowsy money. Now it is in a stage that it is impossible to implement it: Engineers often recognize this. The budget is way too small to succesfully implement the project. Then, at this stage, it is better to cancel it. I have seen this too often....